Home equity is the part of your home that you truly own. It’s the difference between what your house is worth and what you still owe on your mortgage. As you make payments over time and your home’s value increases, your equity grows, like slowly building up savings in your home that you can borrow from later on.
What You Own vs Owe
Think of your home's financial status as having two (2) parts:
- What you own: This is the portion of your home’s value that fully belongs to you. You’ve already paid for this part through your down payment and the mortgage payments you’ve made so far.
- What you owe: This is the portion of your home’s value that you’re still paying off. Each month, as you make your payment, a little more of this “owed” part shifts over into the “owned” part.
Your home equity is the part you actually own.
Example
Imagine your home is worth $200,000.
You still owe $120,000 on your mortgage.
That means your home equity is $80,000 ($200,000 owned minus the remaining $120,000 owed).
Why Home Equity Matters
Home equity isn’t just a number on paper. It’s a resource you can use. Many homeowners borrow against their equity for things like:
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Making home improvements: Using a home equity loan to upgrade your kitchen, add a bathroom, or fix the roof can be a major win-win for homeowners. Not only do you get to enjoy your home improvements, many improvements can increase your home’s value, growing your equity even more!
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Paying for education: College or career training can be expensive, and while student loans are an option, they often come with strict rules and varying interest rates. A home equity loan can give you the funds you need at a lower, more stable rate, making it easier to manage costs while investing in your or your family’s future.
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Covering unexpected expenses: Life happens—a medical bill, major car repair, or emergency travel can throw off your budget. Instead of leaning on high-interest credit cards, a home equity loan gives you access to larger sums of money with predictable, fixed payments, helping you handle surprises without adding extra financial stress.
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Consolidating debt: If you’re juggling multiple credit cards or loans, a home equity loan can simplify your finances. You can roll your balances into one loan with a much lower interest rate, reducing your monthly payments and helping you pay down debt faster.
Borrowing against your home's equity usually happens through a Home Equity Loan or a Home Equity Line of Credit (HELOC). These give you access to the value you’ve built up in your home, often at lower interest rates than credit cards or personal loans.
It's important to know that a home equity loan is secured by your home, which means your house is used as collateral, and you should never borrow more than you can comfortably afford to repay. Used wisely, home equity can be a powerful financial tool, but protecting your home should always come first.
Growing Home Equity
Your home equity can grow in a few different ways:
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Paying down your mortgage: This is the most straight forward approach to increasing your home equity. Each monthly mortgage payment reduces what you owe, increasing the portion of your home that’s fully yours.
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Home value increasing from the market: Sometimes the housing market in your area becomes more desirable: new businesses move in, schools improve, or there’s simply more demand for homes. When the market value of your home increases, your equity rises too, even if your loan balance stays the same.
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Home value increasing from improvements: Renovations and upgrades, like adding a bathroom, finishing a basement, or modernizing your kitchen, can boost your home’s value and subsequently increase your equity.
Laying the Foundation for Your Future
At its core, home equity represents the value you’ve built in your home and the financial opportunities that come with it. Whether you use it to invest back into your house, support your family’s goals, or create more breathing room in your budget, equity can be a valuable resource when managed wisely. By continuing to pay down your mortgage and making thoughtful improvements, you can grow your equity over time, making your home more than just a place to live, but rather a foundation for your financial future as well.
This information is provided for educational purposes only and should not be considered legal advice. Product details, including rates and terms, are for illustration purposes only. Terms, conditions, and features referenced in this article reflect what was generally available to consumers in the market at the time of publication and are subject to change. Actual products and services offered by Prime Financial Credit Union may vary from those in this article. Terms and conditions apply to products, services, and promotions offered by Prime Financial Credit Union; speak to a representative for details. All applications are subject to review and approval.
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